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Martin & Co. is looking to gradually build up its
allocation to U.S. Treasury securities as it scales out of agency
debentures. Agency spreads are extremely tight to Treasuries on a
historical basis and have little room left to run, argues
Michael Holt, portfolio manager of the firm's $1.4 billion
in taxable fixed-income. Holt says the firm could move 5%, or $70
million, into Treasuries if agency spreads show further tightening
as investors gain confidence that the giant mortgage lenders are
addressing governance issues and will grow less aggressively, which
would likely mean less debt issuance.

Signs of a growing government deficit could also drive spreads
tighter as Treasuries back up, Holt says. If spreads tighten by as
much as 10-15 basis points, Holt could move a total of 15%, or $210
million, out of agencies and into Treasuries. Ten-year agencies
were trading 33-35 basis points over Treasuries last Monday, or
about 5-8 basis points wider than they were ahead of Freddie
Mac's recent shakeup of top management.

Concerns over the recent management shakeup at Freddie Mac led
Martin & Co. to move some $70 million out of Freddie Mac
debentures and into Treasuries. Holt says continued negative
headlines could also cause Martin & Co. to reduce its agency
allocation. If, on the other hand, spreads remain where they were
last Monday, Martin & Co. would likely stand pat, Holt says. In
any event, the trades would be duration neutral, across a range of
maturities.

At a duration of 3.0 years, the Knoxville, Tenn., money manager
is short its bogey, the 3.7-year Lehman Brothers
Intermediate Government/Credit index. It allocates 50% to agencies,
45% to corporates, and 5% to Treasuries.